Futures - notions

THE NOTIONS ABOUT THE FUTURES MARKETS

Basis value: The difference between the futures price and the spot price of the commodity.

Contango: The futures price can be above the spot price. This is called contango. In this situation the speculators hold the short position, the hedgers hold the long position. The speculators have the gain as the difference between the futures price and the spot price in return of the risk that they undertook.

Conversion : It is formed by selling call option , by buying sell option and by holding long position in the futures markets.

Daily settlement price: The futures price determined by the exchange after the end of the trading day.

Cash settlement: Settlement which is realized by paying cash the profit or the loss instead of the physical delivery. Initial margin: The margin amount that the buyer and the seller of the futures contracts must pay.

Intermarket spread : It is occurred when you buy and sell simultaneously the futures contracts of the same commodity on the different exchanges.

Intercommodity spread : It is occurred when you buy and sell simultaneously the futures contracts which belong to the commodities related with each other and which have the same expiration date.

Long position: The position formed by buying the futures contract.

Maintenance margin: Minimum margin level for the buyer and the seller of the futures contracts. When the margin fall below the maintenance margin the investor is called to increase his margin level up to the initial margin level.

Normal backwardation: The futures price can be below the spot price. This is called normal backwardation. In this situation the speculators hold the long position, the hedgers hold the short position. The speculators have the gain due to the increase of the futures price up to spot price at the expiration date.

Opposite conversion: It is formed by selling put option , by buying call option and by taking short position in the futures markets.

Short position: The position formed by selling the futures contract.

Spread: There are three kinds: time spread (also called calendar spread,interdelivery spread),intercommodity spread, and intermarket spread.

Synthetic stock position: It is realized by holding T-Bill and by selling the futures contracts.

Synthetic T-Bill position: It is realized by holding the stocks and by selling the futures contracts.

Tail: You can have the profit by investing the gain which is in your account to the short term investments or you can borrow (and pay the interest) for the purpose of the compensation of your loss in the margin account. For this reason you have to calculate the tail coefficient when you determine the number of the futures contracts that you buy or sell.

Time spread(also called calendar spread,interdelivery spread) : It is occurred when you buy and sell simultaneously the futures contracts which belong to the same commodity but which have the different expiration date.